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The law of demand states that, if all other factors remain

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The law of demand states that, if all other factors remain [#permalink]

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06 Aug 2012, 09:05
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The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.
b) a manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.
c) a city experiences an increase in both gasoline prices and the number of people taking public transportation.
d) an increase in the number of computer retailers led to decrease in the average price of computers.
e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

I know we need to find an example, which should illustrated the above example. We have been given that if price increases then demand decrease and answer choice e reverses this logic. My doubt is that how can we be sure that the other side(opposite) of the rule should be True.

[Reveal] Spoiler: OA

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Re: The law of demand states that [#permalink]

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06 Aug 2012, 09:11
Answer is between C & E.
I chose C over E. Since it is conclusion question i thought (E) the reverse reasoning might not be true.

If it was a strengthen Question, definitely E is winner.

Some expert opinion Pls!!!
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Re: The law of demand states that [#permalink]

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06 Aug 2012, 10:40
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I got a PM to respond to this question:

The argument states an inverse relationship between Price and demand. As the price of a product or service is increased, the corresponding demand decreases. Note, you can infer the corollary from the law => price reduction leads to increase in demand

Hence, we are looking for a simple example of such an "inverse" relationship.

Choice C: There is no inverse relationship there. The choice states => Gasoline prices go up, demand for public transportation goes up.

Choice E: The correct answer shows the relationship.

Inverse law: The law very clearly states that price is the only thing (note it says, all things equal) that is causing the demand to go down. In this case, its fair to infer that as you reduce price, the demand will increase because if high price depressed demand then lowering the prices should increase the demand.

Another example: if I said that all things equal (i.e. no other forces present), the harder you push a block on the ground, the faster it would go. Then would you now assume, that the gentler I push the block on the ground, the slower it will go.
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Re: The law of demand states that [#permalink]

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06 Aug 2012, 10:50
egmat wrote:
I got a PM to respond to this question:

The argument states an inverse relationship between Price and demand. As the price of a product or service is increased, the corresponding demand decreases. Note, you can infer the corollary from the law => price reduction leads to increase in demand

Hence, we are looking for a simple example of such an "inverse" relationship.

Choice C: There is no inverse relationship there. The choice states => Gasoline prices go up, demand for public transportation goes up.

Choice E: The correct answer shows the relationship.

Inverse law: The law very clearly states that price is the only thing (note it says, all things equal) that is causing the demand to go down. In this case, its fair to infer that as you reduce price, the demand will increase because if high price depressed demand then lowering the prices should increase the demand.

Another example: if I said that all things equal (i.e. no other forces present), the harder you push a block on the ground, the faster it would go. Then would you now assume, that the gentler I push the block on the ground, the slower it will go.

I took option C as follows: Gasoline price goes up and car owners decrease usage of own vehicles and prefer public transportation. So i took it : Price of Gas goes up and demand for usage of private vehicles goes down.

Am i wrong to think option C that way???
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Re: The law of demand states that [#permalink]

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06 Aug 2012, 10:56
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imhimanshu wrote:
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.
b) a manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.
c) a city experiences an increase in both gasoline prices and the number of people taking public transportation.
d) an increase in the number of computer retailers led to decrease in the average price of computers.
e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

I know we need to find an example, which should illustrated the above example. We have been given that if price increases then demand decrease and answer choice e reverses this logic. My doubt is that how can we be sure that the other side(opposite) of the rule should be True.

Very valid point,but it is mentioned that the other factors are constant.Consider , there are 5 ways from A to B, and if you choose one way to travel from A to B when you have other ways open then the reverse needn't be the same way.But if the other ways are blocked then the reverse can be possible.
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Re: The law of demand states that [#permalink]

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06 Aug 2012, 22:21
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imhimanshu wrote:
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.
b) a manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.
c) a city experiences an increase in both gasoline prices and the number of people taking public transportation.
d) an increase in the number of computer retailers led to decrease in the average price of computers.
e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

I know we need to find an example, which should illustrated the above example. We have been given that if price increases then demand decrease and answer choice e reverses this logic. My doubt is that how can we be sure that the other side(opposite) of the rule should be True.

Responding to a pm:

We need to illustrate "the higher the price, the lower the quantity demanded"

Option (C) does not illustrate this. It illustrates "the higher the price, the higher the quantity demanded of another product". The other product could be a substitute or it is possible that it is just an additional product meeting the same needs i.e. it is possible that number of people using cars and number of people using public transportation, both have increased. Hence option (C) is not correct.

As for (E), you have been given that you can sell 50 pounds of oranges at the rate of \$2 and 75 pounds of oranges at the rate of \$1. You can read it in any way you like - When price increases, quantity decreases OR when price decreases, quantity increases.
Anyway, no other option comes even close.
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Re: The law of demand states that [#permalink]

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06 Aug 2012, 23:47
SOURH7WK wrote:
egmat wrote:
I got a PM to respond to this question:

The argument states an inverse relationship between Price and demand. As the price of a product or service is increased, the corresponding demand decreases. Note, you can infer the corollary from the law => price reduction leads to increase in demand

Hence, we are looking for a simple example of such an "inverse" relationship.

Choice C: There is no inverse relationship there. The choice states => Gasoline prices go up, demand for public transportation goes up.

Choice E: The correct answer shows the relationship.

Inverse law: The law very clearly states that price is the only thing (note it says, all things equal) that is causing the demand to go down. In this case, its fair to infer that as you reduce price, the demand will increase because if high price depressed demand then lowering the prices should increase the demand.

Another example: if I said that all things equal (i.e. no other forces present), the harder you push a block on the ground, the faster it would go. Then would you now assume, that the gentler I push the block on the ground, the slower it will go.

I took option C as follows: Gasoline price goes up and car owners decrease usage of own vehicles and prefer public transportation. So i took it : Price of Gas goes up and demand for usage of private vehicles goes down.

Am i wrong to think option C that way???

Well you are assuming that "increasing fuel is causing people to opt for public transportation". It could be one of the reasons for people opting for another transportation option but not necessary. May be a new bus/train is added for a route.

Hence option C doesnt illustrate the discussed logic clearly. Whereas E does.

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Re: The law of demand states that, if all other factors remain [#permalink]

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30 Mar 2013, 12:32
imhimanshu wrote:
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.
b) a manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.
c) a city experiences an increase in both gasoline prices and the number of people taking public transportation.
d) an increase in the number of computer retailers led to decrease in the average price of computers.
e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

I know we need to find an example, which should illustrated the above example. We have been given that if price increases then demand decrease and answer choice e reverses this logic. My doubt is that how can we be sure that the other side(opposite) of the rule should be True.

First i took c later understand why answer is e.

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Re: The law of demand states that, if all other factors remain [#permalink]

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16 Apr 2013, 01:40
Awesome question, great explanations and I learned a lesson for the GMAT. Thanks everybody! GMAT Club to the rescue!

I got pulled into C as well.

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Re: The law of demand states that [#permalink]

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29 Jul 2013, 22:26
Quote:
imhimanshu wrote:
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.
b) a manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.
c) a city experiences an increase in both gasoline prices and the number of people taking public transportation.
d) an increase in the number of computer retailers led to decrease in the average price of computers.
e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

I know we need to find an example, which should illustrated the above example. We have been given that if price increases then demand decrease and answer choice e reverses this logic. My doubt is that how can we be sure that the other side(opposite) of the rule should be True.

I encountered this question in the MGMAT CR guide and was torn between C & E. I understand why E is the best option but I feel like arriving at E does require introducing outside information, namely, a relationship between lower prices and higher demand, which is not stated in the prompt.

My question is, do you think this is a question one could encounter on the actual GMAT? I read somewhere that correct answers would not require external information and I'm trying to decipher what's outside information vs deduction.

I understand the problem. If we are given this statement: "If you increase the price, demand will decrease", it is not the same as "If you decrease the price, the demand will increase". We don't know the price level. Perhaps the demand is at its saturation point and any further decrease in price will not lead to increase in demand. Perfectly fine.

Let's focus on what is given: If you increase the price, demand will decrease

Say the price of a book is \$20 and you sell 100 books every month. If you increase the price to \$30, say you sell only 50 books per month. - This is valid.

Now, if you are given, "when the price of a book is reduced from \$30 to \$20, the demand for the books increases", is this an illustration of our principle? Sure it is. Note that you are GIVEN that when you decrease the price, the demand increases. You are not required to infer it. If it is given that the opposite holds true, it does illustrate the increase in price lowers demand because when you decreased the price, the demand went up. So since the price was higher, the demand was lower initially. Hence higher price does decrease demand.
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Re: The law of demand states that, if all other factors remain [#permalink]

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30 Jul 2013, 21:07
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.
it does not help to illustrate that when the price increase, the quantity demanded will decrease

b) a manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.
in this case, the demand is unresponsive, which does not illustrate the law of demand

c) a city experiences an increase in both gasoline prices and the number of people taking public transportation.
correct. at the same time the price of gas increase and the public transportation increase, which help to decrease gas consumption

d) an increase in the number of computer retailers led to decrease in the average price of computers.
in this case, higher demand led to lower price, not exactly the rule that higher price will lead to lower demand

e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.
in this case, lower price led to higher demand. this rule is not clearly mentioned in the law, and therefore is not relevant
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Re: The law of demand states that, if all other factors remain [#permalink]

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04 Mar 2015, 02:22
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Re: The law of demand states that, if all other factors remain [#permalink]

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01 Jan 2016, 20:07
imhimanshu wrote:
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________

oh man, I saw that it's a MGMAT 700-lvl question, and thought that it must have some kind of trick, yet, the answer is pretty obvious if you have at least some basic economics knowledge.

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.
in monopoly - the law of demand does not apply. moreover, it does not support what it was said in the argument.

b) a manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.
this is true for veblen goods. for these type of questions, the regular law of demand does not apply. B is out.

c) a city experiences an increase in both gasoline prices and the number of people taking public transportation.
it might be the case that the higher the price for gasoline, the more people take public transport. Nevertheless, this answer choice requires some additional assumptions, and a correct answer would not have such kind of issue. It might be the case that the 2 events are unrelated, or that an increase of the number of people who take public transportation leads to an increase of gas consumption, since more buses are needed to satisfy the demand for the ridership. C is incorrect thus.

d) an increase in the number of computer retailers led to decrease in the average price of computers
this is a reverse cause-effect relationship. Moreover, it might be true that the price of computers plummeted because of the increased competition.

e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.
clearly says that the lower the price, the more is consumed. I attached a "well drawn" picture showing the relationship of Q and P and how Demand and Supply changes depending on the price.
Attachments

s-d.jpg [ 9.75 KiB | Viewed 2281 times ]

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Re: The law of demand states that, if all other factors remain [#permalink]

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15 Jan 2016, 11:41
egmat wrote:
I got a PM to respond to this question:

The argument states an inverse relationship between Price and demand. As the price of a product or service is increased, the corresponding demand decreases. Note, you can infer the corollary from the law => price reduction leads to increase in demand

Hence, we are looking for a simple example of such an "inverse" relationship.

Choice C: There is no inverse relationship there. The choice states => Gasoline prices go up, demand for public transportation goes up.

Choice E: The correct answer shows the relationship.

Inverse law: The law very clearly states that price is the only thing (note it says, all things equal) that is causing the demand to go down. In this case, its fair to infer that as you reduce price, the demand will increase because if high price depressed demand then lowering the prices should increase the demand.

Another example: if I said that all things equal (i.e. no other forces present), the harder you push a block on the ground, the faster it would go. Then would you now assume, that the gentler I push the block on the ground, the slower it will go.

BECAUSE YOU ALREADY KNOW THAT FROM ECON101. IS IT STATED IN THE PREMISE? THIS IS NOT GMAT OF COURSE.
YOU DO THAT IN REAL GMAT, YOU GET A "WRONG" ANSWER!

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Re: The law of demand states that, if all other factors remain [#permalink]

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18 Oct 2016, 02:41
(C) can be true but it doesn't have to be true.

Increase in price of gasoline leads to lower gasoline quantity demanded. But it does not necessarily follow that this is the reason quantity demanded for public transportation increased. It may just be a coincidence. Maybe that increase in public transportation usage resulted because it was during tourist season. We don't know.

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Re: The law of demand states that, if all other factors remain [#permalink]

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19 Nov 2016, 14:39
Choices should be narrowed down to A and E as seen below:

a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.

e) a reduction in the price of oranges from \$2 per pound to \$1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

However, A can be eliminated on the grounds that the argument states "all else equal". With a monopoly, not everything is equal because one firm holds all the cards in a particular market (i.e. think Apple initially with the iPhone). Law of demand will not hold the same in this kind of situation because this firm is the only firm that supplies a product and, depending on the popularity of the product, can push up the price as much as they want without so much as changing the quantity demanded. Thus, we can eliminate.

E is correct.

Hope this helps

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Re: The law of demand states that, if all other factors remain [#permalink]

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11 Mar 2017, 04:18
I don’t know anything about Law of demand but from the argument it states that given that all other parameters remain constant, then the price of the commodity is inversely proportional to quantity. E states the same - price went down - quantity sold goes up.

In C, rise in gasoline prices and no of people taking transportation may/may not have a direct bearing or relationship. It could be that they slashed the ticket rates or introduced more buses etc. We would need to assume that people gave up their comfort of travelling in a car to travel in buses. Even if that is the case then where is the quantity? Does it show that sales of gasoline based cars declined? No

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Re: The law of demand states that, if all other factors remain   [#permalink] 11 Mar 2017, 04:18
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